Final answer:
Crowding out resulting from expansionary fiscal policy is exhibited by increased government expenditures and decreased investment due to higher interest rates, which discourage private borrowing and investment. However, in situations with underperforming economies, central banks may use expansionary monetary policy to counteract these effects.
Step-by-step explanation:
Expansionary fiscal policy that creates a budget deficit can lead to a phenomenon known as crowding out, which is exhibited by increased government expenditures and decreased investment. In particular, the crowding out effect is represented by option (d) increased government expenditures and decreased investment. This happens because increased government spending can raise interest rates, which in turn discourages firms and households from borrowing, thereby reducing investment.
The reason increased government spending crowds out investment is because it can lead to higher interest rates, which reduces business investment and household consumption. Therefore, part 4 of this question is answered by (d) higher interest rates. While expansionary fiscal policy is aimed at boosting aggregate demand, this can lead to higher interest rates due to the increased borrowing needed to fund the government's deficit, which discourages private investment and spending.
However, if the budget deficits are raising aggregate demand when the economy is underperforming, the central bank may implement an expansionary monetary policy to offset higher interest rates caused by government borrowing, resulting in little to no crowding out of private investment.